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Between 2004 and 2008, Indian Railways has not been able to perform to its potential. Normally, Railways’ revenue grows by two percentage points higher than the growth of Indian economy. According to Railways’ own statistics, its revenues growth rate was two percentage points lower than the growth rate of Indian GDP in each of these four years.

The main problem is a severe capacity constraint that does not allow the Railways to carry more freight even when there is demand. Freight traffic has grown by an average of over 9 percent in the last four years but in order to grow further the railways have to concentrate on infrastructure development.

The central government recently set up the National Transport Development Policy Committee to suggest measures to promote greater commercial orientation of transport services in the country. The committee is chaired by Dr. Rakesh Mohan, former deputy governor, Reserve Bank of India, who earlier headed the expert group on Railways that recommended corporatisation of the railway administration in 2002.

Infographic: Hemal Sheth

This might be the right time for the government to consider taking a second look at railway reforms. A senior officer concerned with transport infrastructure planning in the country said that the committee was likely to recommend a few measures in the direction of railway reforms and that there would soon be consultations in this regard with policy-makers and experts.

This would not be a moment too soon. Railways badly needs to grow its revenues because its expenses have shot up. Its ordinary working expenses grew by 7.3 percent in the years between 2004-05 and 2007-08, but jumped by 32 percent in the next year on account of the pay commission. A newspaper report pointed out that the railway surplus too has dwindled to Rs. 1 crore from over Rs 4,400 crore the last fiscal.

“Railways are at a crossroad where business as usual is not sustainable in the long run. If Railways has to be protected as the country’s growth wagon, transformation of the governance structure and augmentation of the accountability levels for delivery and performance is a must,” says infrastructure expert Akhileshwar Sahay who has studied railway reforms across the world.

So what can Railways do? Experts on railway restructuring around the world say that a mix of reforms done in Japan and Argentina could solve key problems. There are four problem areas that need attention right away (see graphic). Some of these can be solved through Japanese style reforms (for administration) while the others will need the Argentinean method (exit non core businesses).

Japanese National Railways was losing $50 million a day before it went in for restructuring and privatisation in 1987. JNR was prone to political pressure, had no discretionary powers and had lost autonomy like Indian Railways today.

As part of its railway reforms, Japan split up its nation-wide services into joint stock companies by region and division. The passenger services were split into six companies and freight services were handed over to a dedicated unit. Bullet trains would be run by another corporation while yet another body would clear JNR’s historical debt. In the years since it restructured its operations, JNR has turned profitable with the three main companies earning profits in the range of $600 million to $2 billion. Accidents have also decreased by over 50 percent.

Indian Railways has 17 administrative zones and a six member Railway Board oversees the functioning of the organisation. It has over 13 lakh employees, runs 15,000 trains and manages over 8,000 railway stations. “If the Railways in India were to stitch together three or four administrative zones into a joint stock company each, they would be able to plan and execute projects at a faster pace. And they can easily unlock a value upwards of Rs. 1 lakh crore if they were to launch IPOs,” says Akhileshwar Sahay.

Argentina, after incurring losses of over $1.4 billion annually, decided to set railway privatisation in motion in 1990. The privatisation strategy adopted by Argentina was to break up the rail network into franchises and hand over their operations and maintenance after putting up these contracts for bidding. This helped Argentina cut down on its subsidies to commuter services from $1 billion to $100 million annually.

Indian Railways is already tinkering with the idea of constructing new rail lines through concessions, having recently proposed building 25 lines in the public private partnership mode. Railways sources say that the ministry spends close to 10 percent of its expenditure on non-core activities such as manufacturing units, schools and hospitals for its employees.

The Railways has tried this to a limited extent by going in for budget hotels under PPPs where private players are invited to build and operate hotels under a lease.

An expert on railway financing in Indian Railways says he was for more concessions being awarded and bringing in private sector efficiencies. “Housing, hospitals and production units are some areas that can be given out on concessions.”

However, all these initiatives will have to be done very carefully. Former financial commissioner with the Railway Board, R. Sivadasan, warns that the railways will have to be very careful if it plans to implement any reforms. “If the Railways operations are turned into joint stock companies then they would have to set tariffs on a commercial basis and may not be in a position to subsidise the poor passengers. Will the poor be able to afford a higher slab?” he asks. Clearly, the Rakesh Mohan committee will have provide a way for passenger traffic to be still subsidised as too many people benefit from this service. But if one were to leave that untouched, Railways has to fix all other things. Passenger traffic should be viewed as a constraint rather than a Holy Cow that can be used to scuttle reforms.